{"id":2729,"date":"2022-01-28T12:00:00","date_gmt":"2022-01-28T11:00:00","guid":{"rendered":"https:\/\/ancstockinvestments.com\/blog\/?p=2729"},"modified":"2022-01-28T10:59:29","modified_gmt":"2022-01-28T09:59:29","slug":"el-salvador-is-betting-its-economy-on-bitcoin","status":"publish","type":"post","link":"https:\/\/ancstockinvestments.com\/blog\/2022\/01\/28\/el-salvador-is-betting-its-economy-on-bitcoin\/","title":{"rendered":"El Salvador is Betting its Economy on Bitcoin"},"content":{"rendered":"\n
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The price of Bitcoin has fallen 43% from its high in November 2021. El Salvador\u2019s president Nayib Bukele is buying the dip.<\/p>\n

As one of the cryptocurrencies\u2019 biggest promoters, Bukele has made the poor Central American country, with a median per capita GDP of less than $4,000<\/a>, one of the biggest boosters of cryptocurrencies. In June 2021, Bukele championed a legislative vote adopting Bitcoin as legal tender in El Salvador<\/a>. At the time, Bukele and many legislators claimed accepting Bitcoin could bring unbanked citizens<\/a> into the economy and enable easier cross-border payments<\/a>, while critics called the move irresponsible.<\/p>\n

Now, that thesis is being put to the test. Bukele\u2019s commitment to Bitcoin has sown distrust among citizens and in global financial markets. Lenders and international bond markets have begun to view Bukele and, by extension, El Salvador as a risky debtor. The country\u2019s economy could suffer, along with Bitcoin\u2019s prospects as a viable currency for other countries.<\/p>\n

Bullish on Bitcoin<\/h2>\n

Bukele\u2019s decision to use government funds to invest in Bitcoin as part of its financial reserves is unnerving creditors. The country holds at least 1,801 bitcoins, according to Bloomberg<\/a>, worth about $66 million as of Jan. 25, or 2% of the country\u2019s listed 2020 reserves<\/a>. (At Bitcoin\u2019s all-time high in November, those coins would have been worth $124 million.)<\/p>\n

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El Salvador\u2019s President, Nayib Bukele<\/p><\/div>\n

Bukele, whose pronouncements often sound more like those of a Wall Street day-trader than a head of state, announced a recent Bitcoin purchase on Twitter. \u201cWe just bought the dip,\u201d he tweeted<\/a> in September. \u201c150 new coins!\u201d Since Bukele bought the \u201cdip,\u201d the price of Bitcoin surged to an all-time high in November 2021, but has since lost nearly half its total value, a crash generally attributed to losses in the traditional financial markets<\/a> amid record inflation and looming US interest rate hikes. Despite the volatility, Bukele announced on Jan. 21 the country had bought 410 additional bitcoin for $15 million, doubling down on his risky crypto gamble.<\/p>\n

While Bitcoin is designed to be an alternative payment system, it\u2019s mostly an unregulated and highly volatile asset<\/a> used for speculation rather than spending. That makes El Salvador\u2019s game a perilous one, according to the International Monetary Fund (IMF)<\/a> and other critics.\u00a0Since El Salvador adopted bitcoin as legal tender in September, its five-year credit default swap\u2014a price measure of how likely a country is to default on its debt payments\u2014has increased four-fold<\/a>, a sign of waning faith in El Salvador\u2019s ability to repay its sovereign bonds. And its devaluing bitcoin holdings are now a major impediment as El Salvador negotiates a $1.3 billion loan<\/a> from the IMF.<\/p>\n

What is Bitcoin doing to El Salvador\u2019s economy?<\/h2>\n

When El Salvador\u2019s legislature approved bitcoin as legal tender<\/a> last June, it paved the way for the cryptocurrency to be integrated into its economy. Bitcoin can now be held in the country\u2019s banks and businesses are required<\/a> to accept it in exchange for goods and services. The government rolled out a digital wallet called Chivo that individuals can download for holding Bitcoin and converting it into US dollars, which has been the country\u2019s official currency since 2001.<\/p>\n

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But by setting up its financial institutions to operate with Bitcoin, and purchasing large sums of it, the government tied the nation\u2019s financial fate to a notoriously volatile cryptocurrency, while asking its citizens to do the same. If Bitcoin continues to lose value, the government risks the treasury reserves it has invested in the currency. Individuals have also already felt the personal risks of using the government\u2019s Bitcoin platform; in the early days of Chivo\u2019s rollout across El Salvador, users reported losing<\/a> money through the digital wallets.<\/p>\n

Even sending remittances through Bitcoin instead of US dollars is more expensive<\/a> and potentially risky if the value of the cryptocurrency falls relative to the US dollar. El Salvador\u2019s economy depends heavily on remittances\u2014nearly a quarter of its GDP in 2020, according to CNBC<\/a>.<\/p>\n

But El Salvador\u2019s financial authorities have insisted that Bitcoin would be an asset to its economy, not a liability. \u201cWe don\u2019t see any risks,\u201d said Douglas Rodriguez, El Salvador\u2019s central bank president, in a recent interview with Fortune<\/a>. \u201cPerhaps, upside risks.\u201d This was part of the pitch to IMF lenders as part of its ongoing loan negotiations.<\/p>\n

But many Salvadoran citizens have protested against the move to Bitcoin<\/a>. In October 2021, shortly after the law was passed, thousands of people took to the streets of the capital city of San Salvador denouncing Bukele\u2019s Bitcoin plan as fraudulent and a power-grab. Bukele said<\/a> in September that 2.1 million people were actively using the Chivo wallet, but a survey<\/a> (link in Spanish) conducted by the Salvadoran Foundation for Social and Economic Development the next month found that 77% of consumers made no purchases with Bitcoin, and 90% of businesses reported no transactions with it.<\/p>\n

Trouble with investors<\/h2>\n

To service its debt, El Salvador needs money. The country\u2019s finances depend heavily on international investors willing to buy more of its national debt, now about 84% of its GDP (dangerous territory<\/a> for a small, slow-growing<\/a> economy). That\u2019s prompted global financial institutions like the World Bank and the IMF to express grave concerns about El Salvador yoking its finances to Bitcoin.<\/p>\n

In June, the World Bank rejected<\/a> a request to help El Salvador implement Bitcoin as legal tender, citing the \u201cenvironmental and transparency shortcomings\u201d of Bitcoin. The same month, the IMF said that adopting Bitcoin \u201craises a number of macroeconomic, financial and legal issues\u201d for the country. But in recent days, the institution\u2019s warnings have become more pointed. In a Jan. 25 report<\/a> on El Salvador\u2019s public debt, IMF directors urged the country to better regulate its use of Bitcoin, citing risks to \u201cfinancial stability, financial integrity, and consumer protection.\u201d They also requested El Salvador drop Bitcoin as legal tender.<\/p>\n

Bukele and his government are now attempting to negotiate a loan from the IMF. In May 2021, Bukele requested $1.3 billion in financing<\/a> to relieve their public debt. Loan negotiations are still underway, but the country\u2019s reliance on an unregulated, high-risk cryptocurrency has complicated the talks with the IMF. Meanwhile, the price of El Salvador\u2019s debt continues to drop on international bond markets. It was last reported as trading at<\/a> 36 cents on the dollar, down from 75 last year.<\/p>\n<\/div>\n